Just Retirement Preliminary results for the year to 30 June 2014 18 September 2014
Rodney Cook Group CEO
Agenda Business update Rodney Cook Financials Simon Thomas Outlook Rodney Cook Q&A 2
What a year! Record sales and EV IPO significantly strengthened our balance sheet Robust market share and richer product mix in a tough post Retail Distribution Review/Gender Directive market place 9 th consecutive Financial Adviser 5 star service award, 5th consecutive top 100 placing in the Sunday Times Best Companies to Work For in the UK survey Successful Defined Benefit de-risking launch, completion of PrognoSys TM on track BUT then there was the Budget, and IUA activity levels fell c50% and have stayed down. We have taken prompt action, cutting costs by 14m, but also adding 5m to our development budget Guidance Guarantee developing positively so far 3
Resilient sales, profit and EV New business sales 1, financial year m IFRS underlying op profit 2, financial year m Embedded value 3, financial year m 1,654 1,751 88 100 97 1,002 198 1,135 242 1,465 1,195 270 1,344 310 1,275 476 74 76 50 55 59 53 796 959 804 893 26 33 41 44 289 344 366 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Annuities LTM New business In force 4 Source: Just Retirement. Note: 1. including DB 2 Normalised new business operating profit for the year ended 30 June 2011 shown (excludes exceptional profit of 14m). 3 Chart shows JRH up until FY12, JRG plc pro forma for 2013 including IPO proceeds
Buoyant market share despite volume declines Fighting hard in a very challenging market 900 800 700 600 500 400 300 200 100 0 Lower individual 1 demand partly offset by DB 2 ( m) 514 519 676 800 H111 H211 H112 H212 H113 H213 H114 DB Retail 544 5 683 87 500 5,438 4,012 1,426 reflects the market contraction post Budget 2 ( m) 5,742 4,152 1,590 6,466 4,473 1,993 7,550 5,058 2,492 6,298 4,401 1,897 5,598 3,663 1,935 4,217 H111 H2 11 H112 H212 H113 H213 H114 Standard IUA 2,777 1,440 We have maintained our IUA segment leadership 2. and achieved a rising share of the total annuity market 2 11.7% 36.1% 10.9% 33.5% 32.5% 31.3% 10.0% 30.5% 31.6% 9.5% 9.7% 8.7% 27.0% 8.1% H111 H2 11 H112 H212 H113 H213 H114 H111 H2 11 H112 H212 H113 H213 H114 5 Source: Just Retirement, ONS, ABI, Towers Watson 1 Includes IUA, Care & FTA, 2 Calendar year basis,
Simon Thomas Group CFO
Summary IFRS results IFRS operating profit ( m, FY) 2014 2013 +/- % IFRS new business operating profit 53.1 58.9-10% IFRS in-force operating profit 43.6 41.1 6% IFRS underlying operating profit 96.7 100.0-3% Operating variances and assumption changes -2.8-11.8-76% Reinsurance and bank finance costs -13.4-9.2 46% IFRS operating profit 80.5 79.0 2% Non-recurring and project expenditure -7.0-6.5 8% Restructuring costs -5.4 0.0 na Investment and economic profits/(losses) 44.1 48.9-10% Profit before corporate costs 112.2 121.4-8% 7
Strong pre-budget sales trends in annuities H1 14 1 sales of 587m were an 8% improvement versus H1 13. DB sales of 87m (H1 13 - nil) more than offset an 8% decline in individual annuity sales The medium term growth trend was robust pre-budget, although RDR and Gender made 2012 volumes unrepeatable in the near term Past single tie distribution opening up eg Zurich and Royal London vesting pensions books JR total annuity 2 sales by half year, m (CY basis) 900 800 700 600 500 400 300 319 455 676 587 514 544 519 349 379 800 688 200 100 0 H1 H2 2009 2010 2011 2012 2013 2014 8 1 Calendar year basis, 2 includes IUA, FTA, DB, care
DB a good start DB sales quarterly progression ( m, FY) DB looks very promising and has been broadly unaffected by the Budget We achieved sales of 92m in the year (FY13 - nil) 50 Margins are satisfactory Inherently lumpy business, but the outlook is promising 37 H2 run rate probably more indicative of the future than H1 3 2 Q1 Q2 Q3 Q4 9
Lifetime mortgages continued momentum Commentary We maintained LTM sales momentum despite tighter terms LTM s at 35% remained above our long term target of 25% of annuities. We are actively exploring funding alternatives Our market share remains robust at 28% LTV at 25%, we haven t had any no negative equity guarantee (NNEG) claims, and the NNEG reserve of 236m was 6.6% of the LTM valuation at 30/6/14 Demand will grow as interest only mortgages mature 250 200 150 100 50 0 Strong LTM sales momentum 1 (CY m) 199 218 163 138 146 126 132 117 101 97 81 H1 H2 2009 2010 2011 2012 2013 2014 LTM as a % of annuities (inc DB) v 25% target (FY 1 ) Market share easing from record levels (CY) 18% 23% 26% 28% 25% 27% 23% 23% 35% 12.6% 14.0% 19.0% 27.0% 33.4% 30.1% 34.0% 28.3% 6.7% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2013 H114 10 Source: Just Retirement, Equity Release Council 1 excludes one off Grainger deal
Cost saving programme fully implemented Cost savings by source The 14m cost saving programme has been implemented as planned In addition to redundancies, we have applied no across the board pay increases We also reduced benefits for all employees and Directors FTE has fallen by 108 since March Other, 28% Benefits, 36% There will be some margin erosion due to time lags, but overall the programme is intended to reduce costs to within allowances Redundancy, 36% 11
IFRS new business operating profit As expected, margins have remained under pressure New business profit has followed sales ( m, FY) Post Budget annuity pricing has been competitive, while growth is on hold 50 55 59 53 Market capacity has been re-directed to the DB market and elsewhere Mortgage pricing remains attractive and has supported the overall spread and therefore total margin. However, new entrants are stirring 2011 2012 2013 2014 5.6% Margins (FY) DB de-risking pricing is slightly better than for IUAs 4.8% 4.7% 4.4% Cost reductions should begin to offset lower volumes by the second half of 2014/15 2011 2012 2013 2014 12
IFRS in-force profit affected by spread compression Low yields pressuring margins Growing in force profit despite lower spreads ( m, FY) In-force profit has grown modestly Tighter credit spreads partly offset liability growth Credit spreads fell from 182bp. to 130bp. putting further pressure on in-force returns during the period, but boosting the economic variance in 2014 26 33 41 44 No effect on in-force results from Budget 2011 2012 2013 2014 In force margins (bp) 103 101 89 79 2011 2012 2013 2014 13
Group embedded value increased close to 1.0bn EEV has risen to 959m This represents an underlying growth rate approaching 20% This has been driven by a strong new business contribution due to the mortgage volumes 1200 Net of tax movements in EEV, m 1000 800 796 115 34-54 83-15 959 600 400 200 0 Opening Proforma EEV New business contribution Return on opening EEV Operating variances and assumption changes Economic variances Non-covered and one off expenses Closing EEV 14
Capital ratios Overall our capital position is in line with post-ipo expectations The ongoing strength of mortgage and DB sales, but not IUA s, has accelerated our capital usage Economic capital cover remains key and at 178% is strong compared to the 140% minimum target Final dividend of 2.2p, which is intended to represent 2/3 of the pro forma full year pay out The directors keep the amount and mix of capital under constant review. We intend to maintain our capital strength, particularly given the opportunity to grow DB volumes JRL P1 cover remains robust Group economic capital in line with expected level Pillar 1 Economic capital m Pro Forma Jun-13 Jun-14 m Pro Forma Jun-13 Jun -14 Total capital available 586 676 Capital required 241 287 Surplus 345 389 Coverage 243% 236% Total capital available 858 1,004 Capital required 467 564 Surplus 391 440 Coverage 184% 178% 15
Outlook Rodney Cook
Demographics remain favourable Large numbers reaching State Pension Age (SPA), key annuitisation trigger The population of over 50 s is inexorably increasing (m lives) Population ('000) 1,000 800 600 400 200 0 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 30% 25% 20% 15% 10% 5% 0% Population (2013) Age annuity policy purchased (2013) % of total annuity sales 16 14 12 10 8 6 4 2 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Men Women The number of men above SPA will gently increase, the number of women will rise again after SPA equalises in 2022 (m lives) DC Retirement income market CAGR 12%, 2013-2023e ( bn) 8 7 6 5 4 3 2 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Men Women 17 50 2013 2023e 17 Source: ABI, Just Retirement, ONS, Towers Watson
What will the new retirement income market look like? The Budget has driven a drop of slightly more than 50% in annuity activity levels. Those with small pots or very large ones have taken their funds or gone into drawdown. But many in the middle ground appear to have deferred any decision until the new rules come into force next April Best advice for many will still be to seek certainty of income for as long as they live. Our medical underwriting means our product will remain competitive The Guaranteed Guidance service may provide access to flows previously captured as internal vestings. Incumbents will fight to keep their customers, but we are pleased that guidance will be independent A key question is whether we will gain more from the previously captive vesting market and our new generation of products than we lose to drawdown New markets may develop for those seeking secure incomes starting later in life. Drawdown customers in their 70s may seek the superior income of an IUA, while enjoying the security of not taking asset risk or longevity risk Guidance could mean more shopping around, and therefore more medical underwriting, even for healthy lives. Our addressable market would then increase in percentage terms, but whether or when it will grow in absolute terms is less clear 18
DB de-risking momentum The medically underwritten DB de-risking market is growing rapidly We target schemes with fewer than 300 lives, and AUM below 200m, but have flexibility to top-slice larger schemes We estimate that of the 7.5bn total DB market in 2013, c. 1.0-1.5bn would have been suitable targets. We wrote 92m of premiums, suggesting real room for growth DB pension indexation also means these liabilities are usually an even better duration match than IUA s for our longer duration LTM s DB de-risking is inherently lumpy, given small numbers of medium to large transactions with long lead times. Average quote size 10-15m, but there are a number of outliers 19
Outlook While there is considerable uncertainty in the IUA segment, the outlook is positive for both the DB and LTM markets We have implemented a 14m cost saving programme, at a one-off cost of 5m incurred in 2013/14 We have a good track record of product innovation, with a further 5m planned spending to deliver new products from April 2015 and subsequently. In response to the Budget reforms we rapidly launched a 1 year Fixed Term Annuity, enabling people retiring now to protect their position until they can consider their choices in the new environment We will ensure that we match capacity to demand in a timely manner, including both processing and balance sheet We are developing new products for the individual retirement income market, and our DB de-risking propositions are capable of much more We have a strong team and believe we are well-equipped to capitalise on our IP by offering products which are compelling 20
Questions?
Appendix: Our business model today
Overview of Just Retirement What we are Award winning product and service propositions Market leading provider of Individually Underwritten Annuities ( IUA ) and Lifetime Mortgages ( LTM ) in the United Kingdom IUA: Offer better rates (compared to standard annuities) to those who suffer from conditions which may detrimentally impact life expectancy LTM: Designed for individuals in retirement who wish to realise some of the equity value in their home Innovative provider of other retirement income products with significant market potential, including DB de-risking, Fixed Term Annuities and care annuities Established in August 2004, acquired by funds advised by Permira LLP in November 2009, IPO November 2013 Office: Reigate, United Kingdom Employees: 834 on average in 2014 Customers: Over 275,000 customers Annuity provider Total annuity premiums Mortgage provider Financial service provider Key financials (year ended June 2014) Top 100 company to work for 1,275m Lifetime mortgage advances 476m IFRS new business operating profit 53m IFRS in-force operating profit 44m Total IFRS underlying operating profit 97m Management: Over 100 years of combined relevant experience Assets under management 7,490m 23
Differentiated business model providing significant competitive advantage Highly automated processes Multi-channel distribution Leading service Experienced and motivated team Strong operational risk management Capital efficient model Sophisticated investment management strategy Fully embedded financial risk management Unrivalled proprietary IP Unrivalled proprietary data in the core IUA segments Experienced medical team Next generation underwriting system: PrognoSys TM 24
Company history 2004-2005 2006-2008 2009-2010 2011 2012 2013 2014 Just Retirement commences operations Mission: "To be recognised and trusted as the provider of financial solutions for people at and in retirement Launches lifetime mortgage plans Staff numbers close to 100; revenue grows to over 100m Launch Just Retirement Solutions offering advice on equity release in conjunction with inaugural partner Saga Lists on the AIM valued at 422m Revenue grows to 500m per year Voted 5 star in the Mortgage Lenders and Packagers category for the first time Permira (Avalon Acquisitions) acquires Just Retirement for 228m, injects 25m for growth Rodney Cook named CEO of Just Retirement New vision: To be the leading retirement brand known and trusted for enriching our customers lives Acquires The Open Market Annuity Service (TOMAS) from Kerr Henderson Voted as one of the best companies to work for by The Sunday Times Core medical team recruited Launches Fixed term annuity with unique conversion feature Total annual volume of new business annuity policies sold by Just Retirement passes 1bn Mortality curves recalculated using PrognoSys TM Launches its defined benefit de-risking solutions proposition in the market Total financial assets reach c. 5.0bn PrognoSys TM being used alongside JR Merica and other reinsurers during development phase Signs partnership deals with Origen Financial Services and NFU Mutual Enters long term care and individually underwritten LTM markets IPO raising 300m of new capital Chancellor announces major annuity market reform Completes major defined benefit de-risking transaction for 36.5m Launches 1-year Fixed Term Annuity 25
What are annuities and lifetime mortgages? Annuities Typically offered to people at retirement but can be taken from age 55 Premium is large up-front payment (funded from annuitant s accumulated pension fund) Insurer provides a series of guaranteed regular payments until death Individually Underwritten Annuities ( IUAs ) Enhanced annuities: medical and / or lifestyle factors (e.g. smoking) which may lead to shortened life expectancy, and; Impaired annuities: significant medical conditions that impair life expectancy (e.g. heart attacks or cancer) Care annuities: guaranteed income to pay residential care home fees (tax free if paid to care home) Defined Benefit de-risking: medically underwriting DB annuity liabilities allows trustees to de-risk at lower cost if their pensioners have above average levels of health issues Lifetime mortgages Allow home owners to release cash from home ownership Lifetime mortgages, where cash advanced is secured against the equity in the property Roll Up: the original advance and any subsequent advances are rolled up at a fixed rate of interest. The loan is payable on death or upon vacation of the property into nursing care Individually Underwritten LTM: provide customers with the opportunity to achieve a higher loan value compared to a standard rollup LTM Interest Choice: similar to roll up, except customers can choose to pay part of the interest in cash per month and over what term Both roll up and interest choice products are available as lump sum and draw down variants No Negative Equity Guarantee protects heirs 26
Real outcomes: our customer rates vs. standard providers Illustrative example Provider Annual income Enhancement if chose Just Retirement Lifestyle 65 year old with high blood pressure and high cholesterol, 1 medication for both conditions Just Retirement quote 3,075 Best standard quote 2,889 +6% Worst standard quote 2,492 +23% Medically Enhanced 65 year old with heart attack within the last 5 years and admitted to hospital, 1 medication daily Just Retirement quote 3,253 Best standard quote 2,889 +13% Worst standard quote 2,492 +31% Impaired 65 year old with end stage renal failure diagnosed more than 10 years ago, hospitalised in the last 12 months, bedridden with dialysis Just Retirement quote 3,872 Best standard quote 2,889 +31% Worst standard quote 2,492 +55% 27 Note: Illustrative examples for 50,000 purchase price and annuity paid monthly in advance, no escalation, 5 year guarantee period, CM4 0JB post code. Quotes correct as of August 2014.
PrognoSys TM Phase II Phase II implementation now underway Quick wins already implemented improving current pricing Longevity experience continues to be in line with the June 2013 reserving basis, which was informed by PrognoSys TM. No further changes expected from that work Working with reinsurers as we transition to PrognoSys TM Evolution of the IP continues, extending our reach to healthier lives and horizon scanning for new pharmaceuticals and technologies 28
PrognoSys TM : colon cancer excess mortality Stage 1 Stage 2 Stage 3 Stage 4 29
Asset mix Total investment assets 7,490m at 30/6/14 AAA 8% AA 8% Mortgages 37% A 26% BBB or below 21% 30
LTM portfolio is low risk LTV of 25% Key statistics Just Retirement has been active in the LTM market since 2005 Average age of customer: 71 years at commencement, 72 years now (1) Expected life expectancy on current book: 18 years Average LTV at commencement very prudent at 18% Even with mortgage interest, current average LTV still only 25% Very low collateral risk average UK house price growth (y-o-y) over successive 18 year periods has not been below 5% in over 40 years Just Retirement has not had a mortgage case that has crystallised a NNEG Out of 35,486 mortgages, only 3 have an LTV over 75% Average loan size (2) : 47,235 Average property value (2) : 243,441 Millions 16% 14% 12% 10% 8% 6% Historic 18 year moving average UK house price growth 4% 1974 1979 1984 1989 1994 1999 2004 2009 2014 600 500 400 300 200 100 0 116 124 East Anglia East Midlands 160 LTM & LTV breakdown by geography (3) 63 214 London North North West 31 Northern Ireland 147 567 Outer Outer South Metropolitan East 102 Scotland 307 South West 80 Wales 194 West Midlands 146 Yorkshire 35% 30% 25% 20% 15% 10% 5% 0% JR Total outstanding JR Average LTV 31 Source: Just Retirement, Nationwide House Survey. 1. As at 30 June 2014. 2. For financial year 2013/14. 3. As at 30 June 2014. Based on total outstanding (original advance plus accrued interest to date).
Synergistic product suite Enhanced riskadjusted yield Higher net yield than gilts / corporate bonds even after NNEG (1) High quality, low risk assets Long duration and good longevity hedge Bond cash inflows time Equity Release Mortgages Non-Linked Corporate Bonds & Gilts Non-Linked Annuities Efficient funding model Annuity business funds all our equity release lifetime mortgages Effective substitute for scarce, high yield, low risk, long dated assets Hedge on new business margins The IUA margin and LTM margin move in opposite directions with change in interest rates, thereby providing a natural hedge 32 1. NNEG (No Negative Equity Guarantee): A guarantee of Just Retirement s equity release plans that ensures that the customer will never owe more than the value of the property and no debt will ever be left to the estate.
Multi-channel distribution for IUAs Channel Outlook on future importance % of JR premiums 2012/13 2013/14 3Q 13/14 4Q 13/14 Examples of JR relationships Financial intermediaries - Networks (1) 56.1% 48.8% 49.7% 48.2% Traditional channels - Regionals 15.0% 14.9% 14.8% 15.7% Specialists Employee benefit consultants 19.9% 22.9% 22.2% 19.6% 4.1% 4.9% 4.9% 8.0% Banks & building societies 2.3% 4.1% 4.1% 3.9% Emerging channels Life insurance companies Price comparison websites (2) 1.7% 3.6% 3.4% 4.0% 0.9% 0.7% 0.9% 0.6% 1. Includes Honister and Openwork. Honister closed to new business in July 2012, Openwork lost contract in November 2012. 2. Includes direct sales. 33
Our overriding company philosophy has created a strong and trusted brand delivering a social purpose Leading brand Delivering a Just Retirement for customers #1 brand for sales achievement in the IUA segment #1 brand for service recognition in the IUA segment Market pioneer Championing the Open Market Option Recognised for innovation e.g. LTM drawdown product Introduced the UK s first convertible fixed term annuity Products delivering significant benefits to customers Supporting the cause of delivering better results for customers Typical income enhancement of 20% to 25% to our annuity customers (1) Equivalent to over 350m of additional retirement income to customers (2) Access to over 1.9bn of household equity to our Lifetime Mortgage customers (2) Committed to the highest standard of business values Consistently achieved top decile performance against TCF regulatory standards Very low volumes of referrals to Financial Ombudsman Service ( FOS ) 59 referrals out of 490,000 policy quotes Total compensation instructed by FOS is 1,690 in 10 years 34 1. Relative to standard writers. 2. Since inception through to June 2013.
Robust financial model: profit drivers Assets Profit drivers IUA customer LTM customer Single premium Regular annuity payment Mortgage advance Principal + rolled up coupon Corporate bonds Gilts Cash LTM 1 (+) (+) New business (+) Premiums (-) Initial expenses (-) Initial reserves (+) In-force Release of prudent reserves: Credit default Mortality LTM Expense Return on surplus assets Profits Reinvestment in new business Reinsurance premium Adverse mortality protection Capital Reinsurance Capital relief Distribution to shareholders 35
Contact and financial calendar James Pearce Director Investor Relations Just Retirement Group 01737 827 245 james.pearce@justretirement.com www.justretirementgroup.com Next results Mon 10 Nov: Q1 15 IMS 36
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